Development Bank Research Bulletin

Rafael Correa: another Latin American president with an econ Ph.D.

Rafael Correa has been favored to become the next president of Ecuador, in the upcoming election, probably after a second-round run-off (See the Latin Americanist Blog for a brief). He is very likely to become another Latin American president with a Ph.D. degree in economics (e.g. Ernesto Zedillo, Mexican president 1994-2000, Ph.D. Yale '81)

He has been rumored to be a leftist and a close friend of Hugo Chavez. Nevertheless, as a U.S.-trained economist with a Ph.D degree in economics from the University of Illinois ('01), and a previous degree from Belgium, it is a neccesory strategy for him to campaign under an ultra-leftist and anti-West platform, otherwise other candidates from the far-left can easy attack him and alienate him based on his U.S. education background.

His former professor, Werner Baer, who is a Latin American expert, knows the trick very well: "My guess is that some of the posture he's taking now is because that's the way he hopes to get elected and win votes. Once in power, I doubt that he would be virulently anti-American like Chavez." He said Correa would more likely follow the lead of President Luiz Inacio Lula da Silva of Brazil, who spooked investors with radical discourse as candidate, but once in office "became extremely orthodox in his economic policy."

In April 2005, Correa was appointed economy minister, but he was forced to resign after four months when he failed to consult the president before publicly lambasting the World Bank for denying Ecuador a $100 million loan. He now portrays himself as a “Christian leftist”, and concurs with Chavez’s attack of Bush by adding that "to call Mr. Bush the devil is an insult to the devil" and that “The devil is evil, but intelligent.”

This cheap talk is all understandable and predictable. Do you know of any other easier strategy that can help you accumulate political capital so fast in Latin America?

His professor Baer described Correa as a top-notch economist, which I would not agree.
At least his doctoral dissertation did not appear to confirm it. According to a self-description Correa made when he was still a Ph.D. student in University of Illinois (UIUC), his research was mediocre:

“My dissertation and research interests are Economic Development and International Economics. Specifically, the first part of my dissertation evaluates the effects of liberalization and globalization on the Latin-American economic growth, investment, and productivity. I am using state of the art techniques in instrumental variables and dynamic panel data models. The panel includes 19 Latin-American countries. The second part of the dissertation studies the economic desirability of a monetary union for the Andean countries. In this study, the basic techniques are vector auto-regressive models and disturbances orthogonalization. The third part of the dissertation is an evaluation of the impact of structural reforms on growth, human development and poverty in Latin America.”

However, he is certainly not a leftist! He is simply a political opportunist. We will see.

Financial Times interviews Lula and Alckmin

Financial Times' Richard Lapper and Jonathan Wheatley has made two long interviews with two leading candidates in the upcoming Brazilian presidential election.

Both Lula and Alackmin are the type of politicians who really try to convincing people by making points rather than by making sensational appeals, which is a bless for Brazilian politics. Indeed, from the long-term historic perspetive, Brazil is probably the most peaceful (baring the everyday petty street crims and the recent Sao Paolo riot) nation in the World. Immigrants from different origins, of different skin colors live quite comfortably along each other (relative to other immigrant nations), and even the military coups turned out to be the least bloody than they usually should be.

Let's see what they have to say to all of us, on the future of Brazil, and how they plan to make it a better one:

Interview transcript: Geraldo Alckmin (Centrist)
Interview transcript: Luiz Inacio Lula da Silva (Left)

My general impression is that,   the two's policies are not fundamentally different (partly because Lula is not that type of radical left, and partly because Alckmin really doesn't have anything new and concrete to impress and convince voters), and Alckmin's inexperience is going to cost him dearly.  Alckmin is much less eloquent and charismatic than Lula, and I don't see hard evidence that Alckmin can really get things done despite his repeated claim that "we have a lot of experiences" in this and in that.

I would bet that Lula is going to be re-elected by large margin.

Time of India: "India 12th wealthiest nation in 2005"???

Times of India: “India 12th wealthiest nation in 2005: World Bank”?  Also in the Hindu

Oh my god! India? Wealthiest nation?  Pankaj Mishra's op-ed "The myth of new India" published in the Hindustan Times makes some very good and sober comments on this type of media euphoria: "Mittal is as much an Indian success story as Sergey Brin, the Russian-born co-founder of Google, is proof of Russian's imminent economic superstardom."

A foreigner, if he never walks out of his Indian hotel and reads only Indian newspaper headlines, will certainly get an impression that Indian is the heaven.

Everyday, you are bombarded by headlines like “Asian Development Bank president: India to become a developed nation soon”,   “Indian banks beat Asian peers” “India to beat China in 10 years: BBC survey” (by the way it was actually a survey of Indians),  “No one has actually made any money in China” , so on and so forth.

Any rankings released by any small organizations, so long as India ranks better than Pakistan or China in one of the numerous components of the ranking system, will be highlighted on the same day on Indian newspapers.

The same is true for China, but never to such an extent. Many Chinese are proud of their country as the 4th largest economies in the world, not realizing that the “wealth” has to be divided by 1.3 billion fellow countrymen, and in an terribly unequal way. But I never see any Chinese newspaper headline that portraits China as one of the “richest” or “wealthiest” nations.

When you read Chinese newspapers, except the state media People’s Daily (which by the way cannot be found in most newspaper stands on the streets. i.e., no one buy it), I will say when it comes to economic news, there is not much difference between Chinese newspapers and Indian newspapers. This is not to say that Chinese media is in any sense free, but that Indian newspapers, at least when it comes to economic news, are as propagandist as Chinese ones. The difference is that: Chinese newspapers are forced to, while Indian newspapers choose to, to please readers.

There is a joke that goes like the following. China and India are the same although one has the strictest media censorship in the world while the other has free media. In Chinese newspapers, you always find a lot of articles about the need for reform and how many hidden dangers are ahead of the economy. In Indian newspapers, you will find the same thing: banking sector problems, pollutions, labor unrest......... in China though!

There are actually quite a few academic studies that try to find out the reason why media industry, even with perfect degree of freedom, will still purportedly propagate biased information. One of the reasons, as many researchers point out, is that readers believe only what they want to believe, and when the benefit of finding out the truth is much smaller than the cost, no one bother to find out.

I think it is quite true. If you cannot do anything about the poverty, why bother emphasizing it on a daily basis. The other day, I saw a BBC article, which highlights the number of Indians living under $1/day. A local Indian commented below the article that: “why do you throw out a number every several days about the poverty of India. We don’t need you to tell me that we are poor. We can see it everyday when we goes to work. We don’t need you to repeat it”

It's qutie true. After you spend you real life in a sweatshop, why don't you want to review your real tough life again when you go home to relax.

Is Nicholas Kristof an idiot? the "******* vs. Netizens" case

Nicholas Kristof, op-ed columnist of New York Times, publishes an article today describing how he tests the limits of the Internet in China.

He started several blogs in Chinese internet service provider, and find that however political sensitive words he includes in the blogs are not deleted, but are just replaced by ******. He thus claims it to be a victory of Netizens, that Internet police are not able to control numerous blogs mushrooming in China.

Yes, Nicholas, you are very smart that you find this loophole in the system.

But everyone knows it too, just no one else is stupid enough to disclose it publicly.

Everyone, except you, understands that the loophole will be closed once it is disclosed publicly.

Provision of  Internet service, including hosting of blogs, is a very competitive business in China. In order to attract users, most providers will always “walk on the edge of the law” and try to create as little inconvenience to users as possible.

This includes, not removing “sensitive words” as the state censors require; instead, they simply replace the words with ******.  Technically, by doing this, Internet service providers violate the law, but the Internet police don’t bother to interrupt. I guess there is implicit agreement between them: Internet police want a quite life; Internet service providers want profit; Thus, police will leave service providers alone unless big troubles are made that humiliate the Internet police.

As a by product, Chinese netizens get a little bit more freedom than the law provides.

This will be soon gone, after Nicholas Kristof’s stupid move; typically the state will feel very embarrassed and feel publicly humiliated (in New York Times!), and then the Internet police will be reprimanded. And boy, who are the ultimate victims? The netizens!!

I still don’t understand why Nicholas Kristof publicizes this. To raise awareness? I guess everyone already knows that Chinese government censors Internet, and what Nicholas is telling us is no big news. Even when you want to raise awareness, there are many better ways that are much better than publicizing a loophole that has been benefiting Chinese netizens!

Certainly, you will say that the ultimate blame should be the government, and Kristof is only the little boy who tells everyone the Emperor has no clothes.

But why do we care whether the Emperor dresses or not!

See Kristof's op-ed article: "In China it's ******** vs. Netizens"
(Sorry I copy this NYT article without permissoin, but considering the great harm he's done to one hundred million Chinese netizens, I think Nicholas should allow me to violate his copyright for several days as a compensation)

Update: So far the two "test blogs" are yet to be closed down.

Should journalist use lies to fight lies? The Apple “slave” labor case

Apple is running into trouble recently. A recent U.K. newspaper report claims that workers at a Chinese iPod factory were working long hours, for little pay, and in "slave conditions". They were said to have been earning $50 a month (or about $1.60 a day) while working 15-hour shifts. The reporters visited two plants in the crowded country, one close to Shanghai and the other near Hong Kong. One, described as iPod City, was said to have 200,000 workers who lived in dormitories on the site.

Labor compensation is really terrible in China, but I don’t think these journalist should use lies to fight lies.

First, in the two locations where the journalist claim they investigate (I guess one in Kunshan and the other in Shenzhen), it is impossible to hire assembly workers at $50 /month. It is just impossible, not because the employers are benevolent, but because factories next doors will recruit away all you workers at the prevailing market price if you offer only $ 50/month.

Reading the report  carefully (I guess most readers will only remember the headline numbers they throw out instead of finishing the whole report),  however, you will find that $50/month is not the wage, but the net saving after deducting expenses as calucauted by the journalists. Should we say that some American workers are paid zero dollars/month because they rarely save money?

Interestingly, the real monthly salary number (about $100 /month) obtained by the journalists (I guess the number should be real, as journalists do not have incentive to over-report the number) meets the minimum wage requirement, which many labor activists believe to be fair but don't think are actively enforced! The report unexpectedly provides evidence that minimum wage law in China does have teeth!

$100 /month is small sum for British, but it is a lot of money in China. Why don’t the journalist make some attempt to put the number into perspective. In inland provinces, government employees (dream position for most local residents ) are paid $100/month.  $300/month is also three times what Indian workers can get.

Why don’t the journalist tell readers what are the alternative income these workers could get if they don’t have a job in the  factory?  It is a poor country, and $100 /month is exactly the same as the country’s GDP per capita. The average monthly British GDP/per capita is over $2800, will you call a British worker who are paid $2800/month a slave!!

Second, in the past five years, Apple sold 42 million i-Pods. If 200,000 workers are employed to produce i-pods, then each worker produced only 210 i-pods so far.  Don’t you think such productivity is ridiculously low. A Washington Post article reveals that the factory is not owned by Apple, but by a contract manufactures Hon Hai precision Industry, also known as Foxconn electronics Inc.  Foxconn does employ 200,000 workers, but Apple is only a client, and only small fraction of the 200,000 workforce work on i-pods.

I really don’t know why the journalists want to throw out a sensational number of "200,000 workers", and the so-called “iPod city” name, just to exploit the popularity of iPod brand name?  And “the 200,000 workers in one site” description also tries to get readers to have an impression that all 200,000 workers are fit into one dorm room!

I want to say to the journalist of Mail on Sunday (the U.K. newspaper that reports the story): 
The best weapon of journalists is fact and truth, if you degrade yourself to the same level of a lying regime, you bring shame to the whole journalist community!

Interestingly, Mail on Sunday doesn't put the report online. Are you fearing of sunshine?

Reference:
Sweatshop conditions at iPod factory reported
Apple eyes labor conditions at iPod plant

Update:

found that Perry Wu in the ChinaTechNews.com has the same views as mine, in his article "Hyperbolic Apple iPod factory woes"

Sun Bin recommends a blog post "A Chinese view of iPod City", which provides a nice summary of the event and coverage. Thanks.

Morris Goldstein and Nicholas Lardy’s solution to Chinese currency problem

Morris Goldstein and Nicholas Lardy’s solution to the Yuan problem:

“...we propose the following compromise. First, China should implement in the next few months a 10 to 15 percent appreciation of the renminbi relative to the current value of the basket. This could be done either by a revaluation or by allowing market forces to push up the currency’s value. Such a “downpayment” would help to persuade external critics that China is serious about controlling its growing external imbalance. Second, China should widen substantially either the band around the central rate or the daily fluctuation limit. That would provide increased independence for monetary policy, allow scope for further renminbi appreciation and give China experience in managing increased flexibility. Third, to offset some of the contractionary effect of the renminbi appreciation, China should simultaneously implement fiscal expansion. Fourth, China should maintain most capital controls until its banks are further strengthened.

This would still require sizeable real appreciation of the renminbi later, with all the problems that such a phased adjustment entails. If speculative inflows resurge, the authorities would need to choose between an acceleration of renminbi appreciation and a temporary recourse to tighter controls on capital inflows. In the final stage of currency reform—when China’s banking system is more stable—China would float the currency and remove the remaining capital controls. Admittedly, this is not an elegant plan. But if it would break the existing logjam in addressing global payments imbalances, it merits consideration.”

see Goldstein and Lardy's full article in the Finanicla Times

Chinese leadership signals support for further reform

China’s party newspaper People’s Daily carries an editorial today urging members to “unwaveringly uphold reform”. This is supposed to silent the rising leftist advocates and disassociate and distance the top leadership from conservative old guards. The editorial is signed by a famous pseudonym “Zhong Xuanli”, in Chinese rhyming “Central Propaganda Department’s Theoretic  Research Division”

For background of the heated debate, please refer to a previous post in the Bulletin: “Socialism or capitalism? New turning point in China?”

Financial Times:  Chinese leadership signals support for further reform

"The mouthpiece of China’s Communist party on Monday urged that members “unwaveringly uphold reform” in a call seen as an attempt by Beijing’s top leaders to silence opposition to wider foreign and private involvement in the economy.

A People’s Daily newspaper article that received extensive attention from other state media and was clearly intended to represent party policy, said China had no choice but to deepen market reforms and open further to the outside world.

“If we do not drive ahead with reform, not only will we be unable to win new achievements, we will also find it hard to maintain the progress we have made in the past,” the article stated.

Its publication follows unusually open and heated criticism during the past year of government policies on issues such as foreign takeovers of Chinese companies and management buy-outs of state-owned enterprises, all set against a backdrop of rising social inequality."

Other media coverage (more will certainly follow; I am particularly interested in how several major U.S. newspapers will interpret the story tommorow):

Times (U.K.) China's secret row bursts into the open

World Bank says big change in Yuan exchange rate not advisable

As reported by Reuters, World Bank country director for China, David Dollar, thinks that big change in Yuan exchange rate may not be advisable.

“For the exchange rate, I have a lot of sympathy for the Chinese government approaching that cautiously," he said. "I agree with the macro-economists who think that it's in China's interests to allow some appreciation of the currency but I respect the government wanting to make that move gradual."

"A big change in the exchange rate really could have unpredictable effects on economic growth," he said.

"In the developing world we often seen these financial crises together with an exchange rate, macro crisis," Dollar added. "I think it's fair to say that's almost impossible in China ... because it's got about $900 billion in reserve." 

Indeed, revaluation of Yuan is in the interest of Chinese government, and I guess that they already realize that appreciation of the currency is key to China's goal of transformation into a domestic-demand-driven economy. It is understanable that they want to do it gradually, not least not to be seen as yielding to American pressures.

Schumer or Snow: who is the dodging the real issue?

Sen. Charles Schumer, D-N.Y., said Treasury's report last week that declined to brand China as a currency manipulator was ”a technical and legislative dodge.”

"China is a manipulator," Schumer said at a Senate Banking Committee hearing, "and the administration is afraid to say so."

Well, Mr.Schumer can accuse anyone of murder too, but when the experts disagree with him (Treasury department report did not find proof of manipulation), he may want to think carefully again whether he himself is actually dodging the real issue. It is agreed by most economists that U.S. domestic deficits are the real driver of the trade deficits. If you consume more than you produce, what else do you expect to see other than deficits? Are you going to blame obesity problems on European candy makers too?

China's surplus trade with the U.S. only accounts for one quarter of United States' trade deficit, which means that even China balances current account with the U.S. overnight, problems are still there. As Michael Woolfolk (senior currency strategist at the Bank of New York) said, "..government and investors will doubtless still be looking for another nation to blame."

"This is an incredibly important issue for my state," said Sen. Debbie Stabenow, D-Mich. "How many jobs are we going to lose from currency manipulation?"

The answer is none. The products China exports to the U.S. were previously made by South East Asian countries and Latin American countries, at a much higher costs though. Manufacturing jobs are moving from these places to China, not from U.S. mainland.  Even if the Chinese appreciates its currency or U.S. imposes high tariff on Chinese products, it is not going to bring manufacturing jobs back to U.S. It will only divert trades from China to other developing countries, and creates a huge financial burden on American consumers.

Snow acknowledged that "the sentiment is pretty strong to do something against China. The handwriting is on the wall and China needs to act."
That’s damn right. The whole trade issue is about sentiment, not about facts. It is always easy and convenient to blame on foreigners, demonize foreigners, than to face the real issues and one’s own mistakes.

Reference:

Sens. Criticize Treasury on China Currency -  Washington Post

Carlos Slim, a shadow Mexican presidential candidate

International Herald Tribune carries a story about “one of the world's richest men turns to Mexico's future”.

Pro-business policy is indeed good for Mexico, but there is reason why business tycoon shouldn’t participate directly in politics.

“Slim, who has amassed a $30 billion fortune building Latin America's biggest telecommunications empire, has stepped aside from running companies to try to set the economic and social agenda for Mexico. Although he is not running in the July 2 presidential election, Slim has been acting like a candidate. He has been traveling the country by private jet in a campaign to convince the next government to cut energy costs, rid the legal system of corruption and allow more private investment in roads, power plants and the state oil monopoly, Petróleos Mexicanos, or Pemex.
....
Slim's 11-page proposal, called the Chapultepec Accord, after the Mexico City park where it was announced, includes making the police and courts more independent, cutting red tape to make government programs more responsive to the poor, and allowing more private investment in housing, schools, clinics, roads and bridges.

"The only healthy way to invest is if it's a combination of public and private investment," he said.

Slim is preparing to profit if his proposals go forward. In September, Slim created a company called Impulsora del Desarrollo & el Empleo en America Latina, or Ideal, to build roads, waterworks and power plants if Mexico's next president follows his recommendations for more private investment.

Absent in Slim's campaign is a call to force more competition in telecommunications. His flagship company, Teléfonos de México, or Telmex, controls more than 90 percent of the fixed phone lines in Mexico. In the past eight years, Telmex has used the courts to block antitrust rulings designed to reduce its dominance."